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Monsanto and BASF may Reap More from Partnership After Syngenta Sale

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Submitted by Food Democracy Now on February 6, 2016 - 6:16pm

By: Ludwig Burger

Monsanto (MON.N) could seek to expand in agricultural chemicals by deepening its partnership with Germany's BASF (BASFn.DE) after losing out to ChemChina in its bid to buy seeds and pesticides firm Syngenta (SYNN.VX).

A growing world population, limited farm land, higher meat consumption and biofuel use are driving demand for anything that improves agricultural productivity and BASF is also keen to expand in the normally high-margin growth market.

But while the Ludwigshafen, Germany-based company is not willing to sell its pesticides unit, recent consolidation in the industry means it is now seen by bankers and analysts as a likely partner in a deeper alliance with Monsanto, with whom it is already collaborating.

Monsanto has long argued it needs to buy or team up with a large crop chemicals maker because farmers will increasingly look for one-stop shops offering seeds, pesticides and digital services, such as satellite-guided spraying and harvesting which enable them to optimize their work in the field.

But after its failed swoop on Switzerland's Syngenta (SYNN.VX) last year, the U.S. company is under greater pressure to strike a deal, with three of the six global power houses in agrochemicals and seeds now out of play.

"Apart from Monsanto, the remaining players are relatively relaxed," said an investment banker with insight into the chemical industry.

Closer collaboration between Monsanto and BASF would be a likely outcome, the banker said, although this would not extend to BASF sharing ownership of its agriculture business, which is ranked third in the global pesticides market.

Based on the multiple that ChemChina offered for Syngenta, BASF's crop chemicals unit would be worth 21 billion euros, or up to 15 billion euros, based on median trading multiples of major sector peers over the last two years.

State-owned ChemChina's agreed deal to buy Syngenta for $43 billion on Wednesday and a deal by DuPont (DD.N) and Dow Chemical (DOW.N) in December to combine their pesticides and seeds units as part of an all-stock merger, has dramatically changed the agricultural landscape in a matter of months.

There is a consensus among analysts and investment bankers that Syngenta is now off the table, with no company willing to top ChemChina's offer, which amounts to a multiple of 16.4 times Syngenta's 2015 times core earnings including net debt.

That compares with a median trading multiple of 11.2 and 11.7 for Syngenta and Monsanto, respectively, over the past two years, Thomson Reuters Starmine data shows.

"Removing Syngenta from the M&A board leaves Monsanto with few options to achieve an integrated portfolio," said Jonas Oxgaard, senior analyst with Bernstein.

BASF and Monsanto could form a stronger alliance, with shared research and sales organizations, which could be the first step toward a jointly-owned company, he added.

FLEXIBLE MODEL

BASF, the world's largest chemicals group by sales, is developing improved plant characteristics such as drought tolerability but relies on partners, the biggest being Monsanto, to bring finished seed products to market.

The two groups have been collaborating in plant research and development since 2007, with BASF contributing about 150 million euros in expenditure per year.

Chief Executive Kurt Bock is under pressure to better position the chemicals giant, which is facing weaker growth and pressure from emerging market rivals in chemicals and plastics, and agricultural chemicals offers one way to do so.

Current weakness in agricultural markets notwithstanding, the crop chemicals unit at BASF has over the last four years made core earnings margins that have been roughly 10 percentage points above the group average.

For BASF, deepening its alliance with Monsanto could offer a welcome opportunity to increase its exposure to agriculture as it is comfortable as a partner and not owner of seed firms.

"This is a very flexible model which allows us to participate in the seed market without having to own seed assets in the portfolio," the group said in a written statement, without commenting on the future development.

Monsanto said in a statement its business and development pipeline makes it the "the innovation partner of choice"

"We have a strong stand-alone growth plan and our shareowners can be assured we will continue to remain disciplined."

Bayer (BAYGn.DE), a close second in the global pesticides market after Syngenta, is likely to seek a major life sciences M&A deal in the next few years, but is not seen as going after Monsanto, whose corporate culture and business strategy is regarded as largely incompatible.